The NY Times had an article discussing the (correct) philosophy that banks should be regulated and managed like utilities while investment banks can be casinos. A bank utility would have severely limited leverage ), and asset quality restrictions. They would also be restricted from having long dated contracts with casinos like CDS’s and Interest rate swaps.
In this case, if a casino (say Bear Stearns) goes bust then we could let it go, since it may affect other casinos but not the fiduciaries of the nations savings. The debate we’re having is whether we can or should save all these corrupt, mismanaged, overleveraged companies. Because of all the interlocking connections to our retail bank deposit system, the government has to save almost everyone.
The NY Times article doesn’t seem to understand that the “utilities” had vastly more leverage than they should or ever used to have (by law prior to 1999). He mentions Northern Rock – which had 42X leverage! It follows that if they had less leverage then the off balance sheet derivative books of the casinos would have been much smaller since a lot of their counterparty exposure was to those banks.
This separation and redefinition would not stop excessive speculation, bear markets and bad lending decisions, but the scale would be greatly reduced and mainly isolated to those casinos that the investment banks have become.